Phase One: Indicators

The indicators that I feel the most comfortable using are RSI, MACD, Moving Average, and Bollinger Bands; therefore, I will research each to understand its limitation and how it was created. Below I will put a summary of my findings for my own referencing in the future. Of course, as time progresses, one or more of the indicators may be replaced.

Moving average (MA)

Combines price points over a specific time frame and divides them by the number of data points to create a trend line. Even though there are three types, simple moving average, weighted moving average, and exponential moving average, I look to stick with the simple moving average in the 20,50- and 200-time frames. This is because I mainly use it to determine the support and resistance and determine when the current trend may reverse when two or more of them cross.

PITFALLS

• Does not consider the change in fundamental factors like competition.

• It cannot be applied to all markets due to the difference in asset price history and volatility.

• The trend can be different depending on the time frame.

• The simple moving average does not weigh the more recent price movement more than past price movement.

• It does not work well when a stock is very volatile.

Moving average convergence divergence (MACD)

Compares two moving averages to determine a change in momentum. If two moving averages are coming together, then momentum decreases, but if they are moving apart, then momentum is increasing.

PITFALLS

• Because it is a lagging indicator, it could lead to being whipsawed in and out of positions.

• Uses dollar value between two moving averages instead of the percentage difference.

Bollinger Bands

Provides a range within which the price of an asset typically trades. The width of the bands determines an increase or decrease in volatility. Shorter width would indicate lower volatility, while larger bands would indicate high volatility.

PITFALLS

• They will not predict the market move as they are a lagging indicator.

• It does not indicate when selling or buying pressure will end.

Relative strength index (RSI)

Determines when a possible dangerous price movement may occur by considering the price change. For example, over 70 would indicate that a security is becoming overbought, while a reading below 30 would indicate oversold.

PITFALLS

• Provides false signals during the trending zone.

• Ignores volume completely during key reversal levels.